2013 Starts Off With a Boom!

The fiscal cliff made for an exciting start to 2013 as the equity markets got out of the gate fast.  This all looks like another real-time case of inefficient markets to me.  Investors were beginning to price in a very negative scenario when the reality was that a deal was going to get done and the highest probability outcome was Congress punting.  But that didn’t stop traders from buying downside protection and selling the market into the new year because of the scary “cliff” that was on the horizon….

Last week in a research note I wrote:

“I think the risk is primarily to the upside as it would take a fantastic policy failure in the next few weeks to prove the bears right at this juncture. That can’t be discounted entirely, but I presume there will be a deal sooner rather than later. This will bring clarity to the markets and should be a positive development.

I still think the risk lies to the upside here as this feels a lot like the environment from November, but we won’t really know the impact of these discussions until we see something on the President’s desk.”

Here are your closing numbers from the best first day of the year in market history:

DJIA: 13,412.5 + 308.41 (2.35%)

SP 500: 1,462.42 + 36.23 (2.54%)

Nasdaq: 3,112.26 +92.75 (3.07%)


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. I said the same thing this past summer and into the November market declines….You shouldn’t mistake me for a permabear as that would be a very inaccurate description….

  2. “Investors were beginning to price in a very negative scenario…”

    Not really. Major indexes were all up high-single or double digits YTD by Dec 30. Markets had gone sideways for a few months and VIX barely broke 20.

    This is the problem. We are so accustomed to crying Uncle as soon as the market drops a few percentage points that we have to be bailed out by someone, anyone!

  3. The challenge of course is that once the global economy is ‘truly’ on it’s feet and improving, the central banks of the world will have to start weening the stock market off the sugar drip. This means lower deficits, mean reversion in profits, etc etc. It would be naive for investors to believe we are back to the good ol’ days (and yet that is the message I see out there). The question I always ask is, “where did the risk go? “

  4. One can be a bear and a bull at the same time. It is pretty obvious that central banks and governments can inflate their economies at will even by making big unrealistic promises (see the recent rally in Japan). It is also pretty obvious that the chances of just ‘growing’ nicely out of these bubbles is slim. Yes, the market will keep rallying as long as the bubble gets inflated, but then two things will happen: either inflation will catch up, or the market will correct.

    In this environment there is no harm in being long equities while maintaining a bearish long term outlook. This is a tactical market.

  5. Actually the best first day of the market ever was 2009. On 1/2/09 the S&P 500 +3.16%, DOW Jones Industrial Average +2.94%, and the Nasdaq +3.50%.

  6. ” This all looks like another real-time case of inefficient markets to me”

  7. I was going to make the same point–2009 was better. If the MSFM was proclaiming this year as the “best ever” that should tell you something in itself.